Agreement and provided for it in their written contract of purchase and sale.
Article in of the Stock purchase Agreement of May 2, 1988, contains the covenants of the parties. Section 5.11 thereof (page 49) provides as follows:
5.11 Settlement of Intercompany Accounts. All intercompany accounts, including those related to taxes of any kind or character, as between the Company [Summit] on the one hand, and Seller [Cargill] or any of its affiliates on the other, shall be finally settled, compromised or paid in full on or prior to the closing Date except as otherwise specifically provided herein. The tax sharing agreement between Seller and the Company shall be canceled on or before the Closing, and no payments shall be made under such agreement after the Closing.
Article III of the agreement sets forth the representations and warranties of the seller, and section 3.07 seller's representations and warranties with respect to Summit's financial statements. Item 2 on Schedule 3.07 to section 3.07 of the agreement provides as follows:
2. The Company followed a conservative position with respect to section 818C deductions, reporting a tax savings of $ 2.50/1000 on its GAAP books. Based on settlements reached by other insurance companies with the IRS, a Section 818C reserve at a $ 5/1000 level is realistic, but still conservative. In December, 1987, Seller and the company settled payments due under their tax sharing agreement at the $ 5/1000 level. Therefore, the Company will adjust its GAAP books to reflect a tax savings of $ 5/1000, which will add approximately $ 14,869,000 to the Company's fiscal 1988 earnings.
Moreover, the Termination Agreement of June 29, 1988, between Cargill and Summit provides in part as follows:
A. Cargill and Summit are parties to a Federal Tax Allocation Agreement, dated July 13, 1983, a copy of which is attached hereto as Exhibit A ("Tax Agreement");
B. Cargill and Virick Limited II, an Illinois corporation ("Virick"), have entered into an agreement, dated May 2, 1988, pursuant to which Cargill has agreed to sell all the issued and outstanding shares of the capital stock of Summit to Virick or its assignee ("Stock Purchase Agreement"), and as a result thereof, Cargill and Summit desire to terminate the Tax Agreement.
NOW, THEREFORE, the parties hereto intending to be legally bound hereby, agree as follows:
1. The Tax Agreement shall terminate, effective as of the close of business, on that date which is the Closing Date as defined in the Stock Purchase Agreement; provided however, if the Closing Date does not occur on or prior to October 31, 1988, this Agreement shall be deemed void and of no further effect.
2. This Agreement has been executed and delivered by the parties with the understanding such may not be rescinded or amended without the prior written consent of Virick, and copies hereof may be provided by Virick to those governmental authorities from whom an approving determination of the transactions contemplated by the Stock purchase Agreement is required or deemed desirable by Virick.
Summit does not dispute the Report's finding that a copy of the Termination Agreement was delivered to SNL and its attorneys prior to closing. Report at 20.
Given these provisions, I believe that the issues raised by Cargill's motions can and should be resolved by application of principles of contract law although the equitable principles articulated in Bangor Punta are not wholly inapplicable. Specifically, Bangor Punta permits the disregard of the corporate fiction "when the equities of the case so require." National Union Electric, 498 F.Supp. at 1006; see Home Fire, 93 N.W. at 1033 ("if the stockholders have no standing in equity, and are not equitably entitled to the remedy sought to be enforced by the corporation in their behalf and for their advantage, the corporation will not be permitted to recover.").
SNL purchased Summit with knowledge of its financial statements, the accuracy of which was warranted by Cargill. No expert testimony is needed to establish that these statements were highly material to the transaction. Summit does not claim that the amounts allegedly due under the Tax Allocation Agreement were listed as an asset or carried as a receivable in the financial statements.
When SNL executed the Stock Purchase Agreement in May, 1988, section 5.11 thereof informed SNL of the existence of the Tax Allocation Agreement, that it would be canceled on or before closing, that any amount due thereunder would be finally settled, compromised or paid in full on or prior to the closing and that no payments were to be made thereunder after closing. On or after June 29, 1988, SNL and its attorneys received a copy of the Termination Agreement, which provided that the Tax Agreement would terminate on the closing date if that date occurred prior to October 31, 1988.
Thus, whether or not the Tax Allocation Agreement was in fact settled, Summit's parent company SNL participated in the closing under an agreement which provided that "no payments shall be made under [the tax sharing] agreement after the Closing." Under the law of any jurisdiction, the language of this contract is unambiguous. Although the claimant in this action is Summit and not its parent SNL, SNL's determination to bring this action in the name of its wholly-owned subsidiary should not permit it to avoid the consequences of a contract it freely undertook to enter.
The decisions relied on by Summit in arguing that the Report should be rejected and summary judgment denied because Summit and not SNL is the plaintiff in this action are unpersuasive. In Minpeco S.A. v. Conticommodity Services Inc., 549 F.Supp. 857, 859 (S.D.N.Y. 1982) the Court declined to pierce the corporate veil of Minpeco which was wholly owned by Peru. In that case, however, the Court based its decision in part on its determination that "at least on the present record, we find no inconsistency between form and economic substance." 549 F.Supp. at 859. By contrast, there is such an inconsistency in this case as SNL would be unjustly enriched if Summit were permitted to recover. National Union Electric, also relied on by Summit, is distinguishable for similar reasons. In that case, the Court found that the equities did not favor disregard of the corporate identity of plaintiff, a wholly owned subsidiary, because the defendants were not the former owners of the plaintiff company and therefore there was no risk of unjust enrichment. National Union Electric, 498 F.Supp. at 1002-03 (Bangor Punta holding is "dependent on the identity of the defendant . . . because permitting plaintiff in effect to attack its bargain and recover back its consideration while keeping the benefits of that bargain is the sort of conduct that shocks the conscience of the court and requires disregard of the corporate fiction to prevent").
Summit relies on Aeronca, 499 F.2d 1367, to argue that a corporation should be exempted from rules applicable to derivative actions when pursuing a direct action to recover corporate monies. See e.g., Response of Summit National Life Insurance Company in Opposition to Defendant Cargill at 15-19 (also citing Home Fire); see supra n. 6 (for distinction between law and equity). Aeronca, however, turned on the determination that the contemporaneous ownership rule did not apply to direct actions by corporations. See also supra n. 6 (distinguishing Aeronca on other grounds). Summit's reliance on Aeronca is misplaced because Cargill's submission is that this action is barred by the equitable concept of unjust enrichment rather than by the contemporaneous ownership rule. See e.g., Defendant Cargill Inc.'s Reply Memorandum in Support of its Motion for Summary Judgment at 8-11; National Union Electric, 498 F.Supp. at 1000-01 (holding that contemporaneous shareholder rule does not apply to suits by a corporation but "recognizing its relevance only insofar as it incorporates . . . notions of 'windfall or unjust enrichment").
Summit argues that a corporation should not be prevented from pursuing a corporate cause of action simply because ownership of the corporation has changed hands. See e.g., Response of Summit at 19-21 (relying on National Union Electric and Mauck, 361 F.Supp. at 1318-19). In Mauck, the Court refused to put aside the corporate fiction both because the contemporaneous ownership rule does not apply to direct actions by a corporation and because the claims asserted by the purchased corporation in Mauck were referred to and considered by the purchaser at the time of the acquisition. Mauck, 361 F.Supp. at 1318-19. Similarly, in National Union Electric, Judge Becker held that because the corporation's lawsuit was ongoing at the time of the purchase, the corporation's new owners "contemplated that the lawsuit would accompany the corporation when it changed hands" and therefore that equitable considerations did not require disregard of the corporate entity. 498 F.Supp. at 1004.
In contrast, the lawsuit in this case was not ongoing at the time SNL purchased summit. Indeed, Summit concedes that prior to the sale to SNL it would not have sued Cargill "given that Cargill controlled Summit." Response of Summit at 22.
Nor is it likely that the lawsuit was contemplated or considered by SNL at the time of the purchase since SNL and Cargill provided explicitly in the Stock purchase Agreement that the tax accounts would be settled prior to the closing. Neither National Union Electric nor Mauck supports Summit's argument.
National Union Fire Insurance Co. v. Continental Illinois Corp., 666 F.Supp. 1180 (N.D. Ill. 1987) is not to the contrary. In that case, the Court permitted FDIC as the new majority shareholder in Continental Illinois Corporation (CIC) to pursue direct claims against the former directors and officers of CIC which had been assigned by CIC to the FDIC as part of the bailout deal. National Union Fire Insurance, 666 F.Supp. at 1195-97. Unlike the situation here, the Court held the concept of unjust enrichment was not applicable because the assignment of the direct claims was part of the consideration for the FDIC's assumption of the Bank's debt. Id. at 1197. There is no contention in this case that SNL paid consideration for any claims by Summit against Cargill. More importantly, in this case Summit concedes that "SNL, the shareholder, would have no right to bring this action on the Tax Allocation Agreement in its own name." Summit National Life Insurance Company's objections to the Report and Recommendation at 9, n. 7.
I will approve the Report to the extent that it is consistent with this Memorandum and adopt the Recommendation that defendant Cargill's motion for summary judgment be granted.
EDITOR'S NOTE: The following court-provided text does not appear at this cite in 807 F. Supp. 363.
AND NOW, this 20th day of April, 1992, upon consideration of the Report and Recommendation of Magistrate Judge M. Faith Angell, the objections thereto and of the supporting and opposing memoranda, it is hereby ORDERED that the Report is approved to the extent that it is consistent with the accompanying memorandum and the Recommendation that summary judgment be entered against plaintiff is adopted. Judgment is hereby entered in favor of defendant Cargill, Incorporated and against plaintiff Summit National Life Insurance Company.
THOMAS N. O'NEILL, JR. J.